Pinterest (PINS) raised $1.425 bln selling 75 mln shares at
$19 in a high-profile IPO. The original price range was $15-17/share,
indicating strong demand.
The deal gives Pinterest a valuation just above $12 bln, in-line with the company's latest funding round in 2017.
PINS is a social media platform that people visit in order
to share and discover ideas for virtually any life activity -- sort of an
online scrapbook. Just a few examples would include cooking, home decoration or
remodeling, fashion ideas, or significant events like weddings or vacations.
The ideas, posted as photos, videos, and/or writing, are called "pins,” and
the people who post them are referred to as "pinners."
The platform is especially popular among women; two-thirds of its audience are female. In the U.S., PINS is reaching 43% of total internet users, including approximately 80% of women ages 18-64 with children. This lack of diversity in its user base does constitute a risk for the company and its investors. In order to maintain solid user growth rates, it will eventually need to grow the number of users in other demographics.
People often visit Pinterest with an intent to buy something but have not yet decided which product or service they want. Additionally, according to a survey by Comscore, more people said that Pinterest helps them find new shopping ideas than other consumer internet sites. On a related note, 68% of people said they discovered a new brand or product on Pinterest.
This progression of a user's journey — from inspiration, to planning, to action — takes them through the “full purchasing funnel,” and advertisers can reach them throughout this entire process on Pinterest.
PINS generates revenue exclusively through advertising. Its "Promoted Pins" contain either a single image, a carousel of images, or video. Its addressable market includes online brand advertising; offline brand advertising as people use Pinterest in similar ways as catalogs or magazines; and online performance advertising focused on lower/middle funnel behaviors. Those behaviors include users browsing ideas and visiting merchants’ sites, which may eventually lead to a purchase.
As noted above, one of the key challenges facing PINS is
that it needs to make its platform more enticing to a broader base of users. To
address this, the company plans to make some platform enhancements that might
attract new users. This includes exploring new features that encourage users to
discover a broader set of verticals, like automotive, financial services,
technology, and media. Additionally, it will seek to make the platform more
accessible to users around the world by localizing the product and content
In terms of monetization, PINS is still in the early stages of its efforts and is looking to develop new advertising products and capabilities that will drive revenue growth. This could include improving the relevance of ads individual users see based on that users' tastes and interests. Additionally, the company wants to diversify its advertising base further, which it believes will enable it to drive better ad relevance.
From a broader perspective, the total global advertising market is expected to grow to $826 bln in 2022 from $693 bln in 2018, equating to a CAGR of 5%. However, digital advertising is expected to grow at a much faster rate, with IDC forecasting a CAGR of 12% during this span.
Financials & Valuation
Taking a look at its financials, something that immediately
stands out is that its operating losses are rapidly shrinking. That is not
necessarily a common attribute for high-growth tech IPOs; PINS has taken a more
conservative approach to spending. That said, its growth rates are still quite
For FY18, revenue climbed by 60% to $755.9 mln. While that growth rate may lag other tech IPOs, such as in the cloud software space, it is still very impressive given the scale of the business. Driving its growth has been the steady increase in monthly active users (MAUs). In 4Q18, MAUs were up 23% to 265 mln, with international markets driving the growth, up 32% to 184 mln. PINS expects international growth to continue out-pacing US growth in the near term.
Quarterly average revenue per user has also been trending higher hitting $1.06 (+28% yr/yr) in 4Q18, its highest on record.
For most up-and-coming tech companies, Sales & Marketing is the largest expense, oftentimes expanding at rates near or higher than the top-line. In the case of PINS, its Sales & Marketing expense increased by 60%, matching its revenue growth rate. As a percentage of revenue, it was steady at 34%, which is actually on the lighter side for a tech IPO. Its other main expenses, Research and Development and General and Admin, decreased as a percentage of sales.
Consequently, its loss from operations also shrunk to ($74.7) mln from ($137.9) mln in FY17.
As for valuation, $19/share equates to just over $12 bln, or roughly 16x trailing revenue. Facebook (FB) and LinkedIn both had trailing P/S of about 19x based on the mid-point of their IPO price ranges, while TWTR had a P/S north of 30x. Assuming revenue growth slows to 40% this year, the Pinterest IPO priced at ~11x forward revenue, which is higher than the current valuations for Snap (SNAP) at 9x and for Facebook and Twitter (TWTR), both at ~7x.
Pinterest stock is currently indicated near $23/share, which
would put the valuation close to $15 bln.